What Is a Conventional Loan?
Written by Jason Nelson on August 28, 2017
According to industry experts, a conventional loan or mortgage is any type of loan that’s not secured by a government agency, such as the FHA, FmHA and VA. But to provide a more comprehensive answer to the question, “What is a conventional loan?” it’s critical that we address a few more aspects relating to conventional mortgage lending.
What Is a Conventional Loan: Going Beyond the Obvious
Since conventional loans aren’t guaranteed by government entities, they pose a higher risk for mortgage brokers. Thus, potential homebuyers who wish to finance home purchases with conventional mortgages must meet more stringent underwriting standards compared to the requirements of FHA, FmHA or VA loans.
Additionally, conventional loans are divided into two distinct categories:
- Conforming mortgages, which adhere to the underwriting guidelines set forth by Fannie Mae and Freddie Mac.
- Non-conforming loans, which don’t comply with the funding criteria of the two aforementioned government-sponsored enterprises. One example of such a loan is a jumbo mortgage of, let’s say, $700,000. Considering that the maximum loan limit for one-unit properties in most of the continental US is $424,100, a $700,000 mortgage won’t qualify as conforming.
The Advantages of Using a Conventional Loan
We cannot provide a complete answer to the question, “What is a conventional loan?” without talking about the advantages it brings. These are as follows:
- Conventional mortgages are typically long-term, fixed-rate loans – The payments of conventional loans are generally spread over 25 to 30 years and have the same interest rate for the entire length of the mortgage. These loans are also fully amortizing. Since monthly payments are applied to principal and interest according to the amortization schedule, the mortgage is fully repaid at the end of its term.
- Conventional loans often feature lower interest rates – In the highly competitive lending market, lenders are willing to accept lower interest rates as long as borrowers have good credit scores, stable income and can make down payments of at least 20% of the purchase price. What’s more, depending on the credit and financial situation of a borrower, he or she can get a conventional loan with as little as 3% or 5% down. In this case, however, the borrower will need to pay PMI.
- Conventional loans have shorter processing time – When it comes to answering the question, “What is a conventional loan?” another aspect potential borrowers should consider is the approval process. Because conventional mortgages don’t need to comply with the guidelines of government-backed loans, conventional loan applications often involve a more straightforward, streamlined and shorter approval process.
- A conventional loan can be refinanced with less than 20% equity – A common misconception is that homeowners need at least 20% equity in their homes in order to qualify for a conventional loan refinance. In reality, mortgage brokers provide a variety of refinancing programs for homeowners who have less than 20% equity. Additionally, a traditional home equity loan or a home equity line of credit can be used to cover large expenses like home improvements, higher education, medical bills and down payments on second homes.
In North Florida, mortgage brokers usually carry a vast array of mortgage products. In order to get the right type of loan, we advise prospective homebuyers to approach an experienced and reputable mortgage company that can recommend the best home financing options for the financial situation of each applicant.
If you would like to get additional details that answer the question, “What is a conventional loan?” or to learn more about the services and products we offer at North Florida Mortgage, please call us today at (904)-389-4635.